Making sense of NUFC finance
Following the sale of Andy Carroll, the TOTT message board has been trying to make sense of the Toon`s accounts. We attempt to provide some clarity.
The Carroll situation was indeed baffling. The manager stated that "financially we could not keep him" whilst his Chairman, Derek Llambias added "'The fact is Mike Ashley didn't want to sell him, it's not like he needs the money is it?" One of these statements may be true, but which one?
In May last year, the club issued a statement as to the guiding principles for the next 5 year plan. It is stated that "the ultimate goal will be to ensure that the club is run at a 'break even' manner by the year 2015/2016". It might naturally be assumed that the club would run at a loss until then, but this was not made explicit. Indeed the opposite might be true.
There are a number of approaches that can be taken to answer the question, and of course there is an element of guesswork involved. However, past experience of projecting the financial accounts suggests that a reasonable degree of accuracy can be assured.
The club is expected to have made a loss last season, coping with a year in the Championship. The accounts have to be submitted before the end of March, and we shall have some idea then the extent of the damage. What is happening this season will not be in the public domain perhaps until March 2012.
By way of comparison, a reasonable starting point would appear to be looking at the accounts from the previous Premier League season, which saw the relegation. A loss was posted of £15.2m. What is important is how that loss was made up.
Simply put, a club has income and costs. For accounting purposes, there are some technicalities that allocate costs to different years, notably the transfer fees paid for players, but more of that later.
Newcastle United`s income, or revenue, is broken down into 3 broadly equal areas, Matchday, which is gate money, TV deals which are probably self explanatory, and Commercial, which is made up of all other activities, from sponsorship to shirt sales and royalties.
Gates are fairly similar to the relegation season, with prices pretty much the same, so we can expect to see little change from the 2008-9 figure of around £29m, which was in fact down by around £3.5m on the season before. Commercial income might also be expected to be similar, with kit sales typically showing an increase when new strips are available. There has been a new kit this year. Total income then was around £85m, down from almost £100m the previous year.
The biggest change compared with 2 years ago is that TV revenues have increased significantly, overseas arrangements reported to be leading to a reported increase of around £20m compared with previous years in the Premier League. On balance, the assumption is made that this is indeed the case, leading to a total club income in excess of £100m, perhaps significantly.
The largest element of costs is that of players` wages. 2 years ago this was approaching £72m, an inordinate percentage of turnover at over 80%. Conventional wisdom suggests that 50% is the maximum to be prudent.
Expensive players have gone. Notable wage earners who departed after relegation were Owen, Viduka, Martins and Duff and Cacapa. It will be remembered that Shay Given left in the January window, with Nicky Butt since retired.
Other experienced players to have gone through the exit door include Beye, Geremi and Faye with Xisco out on loan. Some contracts have been renewed at an improved rate, with other younger players brought in. Even so, it is a conservative estimate that the wage bill is now around £45m per year, a saving of over £25m.
This is the technical bit, so if you are not ready, skip this paragraph. Next on the list is amortisation. Trying to keep it simple, if a player is bought for £10m on a 4 year contract, the fee is spread over the life of the contract, so costs £2.5m per year, which is the "amortisation" figure. In the relegation season, amortisation was almost £20m, but included players whose figures were high, starting with Michael Owen at over £4m per year.
Current players who have been purchased and still amortised include Smith, Barton, Coloccini, Simpson, Gutierrez, Ben Arfa, Routledge, Best, Enrique and Tiote. As far as the profit figure goes, the difference is a saving of around £6m on a conservative estimate.
A further item related to the sacking of Sam Allardyce, a net cost of £6m. This is offset to a relatively minor extent by the sacking of Chris Hughton. Although under normal circumstances interest payments would also have to be considered, Ashley`s loans to the club are interest free, saving around £6m compared with previous years.
The last major item to consider in profit and loss is that of players sold. Players are valued at "book" value, i.e. the amount they cost minus the amortisation. The £10m player on a 4 year contract who is amortised at £2.5m per year is therefore worth £7.5m after 1 year, £5m after 2 years and so on. If they are sold, a profit is calculated based on the book value, not the value when purchased.
Major sales during the relegation season were Milner, N`Zogbia, Given, Emre and Faye. They all led to a positive in the accounts, a total of £23m. This season, nobody has been sold, therefore this has an adverse effect on the accounts for this year before the sale of Andy Carroll, a player who cost nothing, but has been sold for a reputed £35m, giving a net gain this year of £12m compared with 2 years ago.
In summary, there have been gains of £20m, £25m, £6m, £6m and £12m, totalling £69m. Against this is the loss made 2 years ago, of £15m, which still leaves a very significant profit, even allowing for inaccuracies.
In fairness to the club, there has been a change in policy, paying for players transferred in up front, which means that the profit figure is not necessarily translated into money in the bank. If for example, Tiote was bought for £4m, that represents cash out, but the accounting cost, assuming a 4 year contract, is only £1.5m.Therefore, not all of the £54m or so profit is cash in the bank.
Depending on the response to this piece, the cash position can be looked at in another article and needs to be balanced against advance season ticket sales under the current offer.
The club is more than welcome to challenge these figures, all of which have been sourced as reliably as possible. Indeed, any clarification is more than welcome. However, the overall message is clear, that a loss making club has been turned into a profitable one, perhaps even the most profitable in the Premier League.
That profit will ultimately be offset against the considerable cost that Ashley has undertaken in buying Newcastle United and taking on the debt mountain left by his predecessors. If he wishes to sell, it should certainly be an easier task than after the mess created in the Shepherd era when a number of buyers bailed out after the due diligence stage.
Where we go from here is either with Ashley, making a profit out of the club, or with a new buyer, able to compete on a sound financial footing. The contract renewals over the next couple of years might persuade Ashley that the exit door is the most attractive option. Time will tell.
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